| Summary: | 碩士 === 銘傳大學 === 金融研究所 === 85 === This study is to investigate the effectiveness of corporate risk management in reducing the agency costs of debt, combimes with asset substitution and underinvestment problems. We examine when the investment risks are divided into observable and unobservable risks, whether the investment risks can be reduced by the hedging strategy which then eliminates the agency costs of debt, or whether the manager-equityholders will be slack in his work after the investment has been hedged, in other words, have the incentives of moral hazard.
We deal with the agency problems between debtholders and manager-equityholders by the principal-agent game of the game theory, and calculate each period''s subgame perfect equilibrium with the backward induction of the dynamic programming.
In this paper, we construct a multiperiod dynamic model to discuss the conflicts of interests betweem debtholders and manager-equityholders, then go further into the efficiency of the hedging strategy in reducing agency costs of debt. We demonstrate that the degree of efforts took by the manager-equityholders will be smaller in the leveraged firm than in the unleveraged firm. We also find out that the hedging strategy can reduce agency costs of debt only when there exists “complement effect between risks ”. On the contrary, the effectiveness of the hedging strategy under “substitution effect between risks ”if not evident owing to manager-equityholder''s incentives of moral hazard. Finally, we hold that the investment plan has complement effect between risks when manager-equityholders are risk neutral, and the hedging strategy will be effective. Moreover, we suggest that the agency costs of debt will not arise in the circumstances that the company issues mortgage corporate bonds.
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